Michael Jolliffe - Chairman Harry Vafias - CEO Fenia Sakellaris - Finance Officer

Randy Giveans - Jefferies

Good day, and welcome to the StealthGas Second Quarter 2018 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Jolliffe, Board Chairman of StealthGas. Please go ahead, sir.

Thank you very much. Good morning, everyone and welcome to our second quarter 2018 earnings conference call and webcast. This is Michael Jolliffe, the Board Chairman of StealthGas. With me today is our CEO, Harry Vafias and our Finance Officer, Fenia Sakellaris. Before we commence our presentation, I would like to remind you that we will be discussing forward-looking statements, which reflect current views with respect to future events and financial performance. At this stage, if you could all take a moment to read our disclaimer on slide 2 of this presentation. Risks are further disclosed in StealthGas’s filings with the Securities and Exchange Commission and I would also like to point out that all amounts quoted unless otherwise clarified are implicitly stated in US dollars. Slide 3 summarizes the key highlights of the second quarter results that we released today. Overall, our performance in Q2 ’18 was better than the market anticipated. The strengthening of rates and demand led to a noticeable rise in revenue and a 97.8% operational utilization, which is our best performance since the first quarter of 2014. In addition to this, we managed to preserve our OpEx base at moderate levels, in spite of the operation of our new 22,000 cbm LPG semi-refrigerated vessels that are more expensive to run than the smaller LPGs. In an attempt to ease our cost base further and lower the average age of our fleet, we proceeded with agreements to sell yet another four small LPG vessels, the majority of which are over aged at very solid prices. Improving market conditions allowed us to successfully implement efficient chartering strategies and managed to reduce our commercial off hire for this quarter to as low as 2 days per vessel. In this environment, we achieved strong voyage revenues of 43.4 million, thus boosting our adjusted EBITDA up to about $20 million. As for our leverage and cash position, our gearing remains at low levels, around 44%, whilst we maintain a healthy and restricted cash balance of approximately USD56 million. In slide 4, I would like to provide some more information on the sale and purchase activity of StealthGas. Since the beginning of 2018, we have announced the agreements to sell seven small LPG vessels, the majority of which will be delivered to their new owners by the end of 2018. As indicated in the table presented, the aggregate sale price for these vessels is about $40 million, while net cash proceeds, that is net of any debt repayment, is in the order of about 30 million. The market is strengthened and so have asset values, even for ships over the 20-year mark. Therefore, we decided it was a good time to proceed with the sale of mostly older tonnage, as this significantly enhances our liquidity and allows us to ease our costs. Market strengthening is evident from the hefty sale premiums above demolition value, which range from 2.5 times above scrap price to about 11 times above scrap price for modern ships. In addition, with these sales, we managed to modernize our fleet. Following the delivery of these new vessels, the average age of our fleet will be reduced from the current 9.4 years to 8.8 years. As it concerns to adding vessels, there are no plans for further vessel acquisitions for the time being. This does not mean however that we will not evaluate any acquisition, should this opportunity arise. Slide number 5 provides an analysis of our fleet employment. In terms of charter party types, out of a fleet of 55 operating vessels, we have 13 of these on bareboat, 33 on time charters and 9 in the spot market, four of which are employed in the series of consecutive spot voyages. During the past three months, deemed as a soft seasonal period for our markets, we concluded three new time charters and charter extensions. The interesting aspect of these renewals is that all of them occurred at daily rates, approximately 15% higher than their previous fixtures. We have 74% period coverage for the remainder of 2018. And excluding the vessels agreed to be sold, 10 vessel charters that will expire by December. Based on how our market is moving, it is highly probable that these vessels will be re-chartered at improved rates. In terms of our fleet geography presented in slide 6, our company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels, as of August the 16. Currently, 51% of our LPG fleet trades in the Middle East and Far East, about 29% in Europe, 8% in Africa, 8% in America and 4% in Australia. In the second quarter of 2018, and compared to the previous quarter of this year, we did not have any significant changes in our fleet trading profile. I will now turn the call over to Fenia Sakellaris for our financial performance. Thank you so much.

Thank you, Mr. Jolliffe and good morning to everyone. So, let me continue the presentation, focusing on our financial performance for the second quarter of ’18. As explained at the beginning of our call, our performance in the second quarter of ’18 was far stronger compared to our performance in the first quarter of the year, primarily because we had no ballasting nor any significant repositioning of vessels, as we did in the first quarter. During our previous call, we explained in detail that in the first quarter of the year, we incurred heavy ballasting costs and lost valuable employment days, especially for three of our new semi-ref LPG vessels. This quarter, our fleet was employed at full speeds, both in the time charter and spot market, a fact quite evident from the impressive 97.8% operational utilization we accomplished. Favorable market conditions, that is firm demand for LPG and rising rates, have begun to be more visible to our revenue stream and we anticipate this to become even more evident as we gradually employ our vessels in new period contracts. We must note however that the weak tanker market continues to deprive us of a significant amount of revenue, but luckily all of our tankers are currently employed on period charters. Let us move on to slide 7 where we see the income statement for the second quarter of ’18 against the same period of the previous year. Voyage revenues came at 43.4 million, marking a sharp rise of 4.1 million compared to the same period of last year. This quarter, our revenues from period contracts increased by almost 11.5%, while our spot revenues by 9% compared to Q2 ’17 due to higher prevailing market rates. Indeed, we concluded all of our new charters at levels of about 10% to 15% higher than previous hires, the outcome of which is an obvious revenue rise. Voyage costs amounted to 4.3 million, marking a 280,000 decrease compared to Q2 ’17. This decrease is an outcome of fewer spot days, while the decrease in voyage costs compared to the previous quarter of this year is because we didn't incur any ballasting costs. Regardless of this voyage cost reduction, we need to know that bunker costs increased this period compared to the second quarter of ’17 by almost 27% due to the increase in oil prices. Net revenues, that is revenues after deducting voyage costs, came at 39.1 million, corresponding to a net revenue margin of 90%. Running costs at 14.9 million market about 500,000 increase compared to Q2 ’17. This increase in costs was an effect of the operation of the three new 22,000 semi-ref LPG vessels, which are more expensive than the small LPGs and they had not yet been delivered in the same period of last year. Therefore, our operating costs increased in spite of the reduction of our fleet by two vessels compared to the same period of last year. We would like to note however that compared to the first quarter of the year, during which we faced increased technical needs, we managed to reduce substantially our OpEx base, virtually across all operating cost categories. Dry docking costs amounted to approximately 0.6 million, resulting from the dry docking of two small LPG vessels. As far as our impairment charges of 3.8 million are concerned, these relate to five of the vessels agreed to be sold. Based on all of these, our EBITDA is in the order of 15.9 million, while our adjusted EBITDA, excluding non-cash items, that is, is much stronger in the order of 20 million, which is 4.5 million higher than in the same period of last year. Interest and finance costs marked a 1.9 million increase, attributed to the increase of our bank debt, but also to the increase of LIBOR rates. About LIBOR rates, we would like to mention that the three month LIBOR was around 130 basis points in the second quarter of ’17, and gradually climbed to 235 basis points as of the end of the second quarter of ‘18. Our current swap coverage is 25% of our outstanding debt and we are trying to investigate opportunities to increase our swap cover slightly further. Our current swaps are in the money [ph] as our weighted average swap rate is in the order of 225 basis points. Based on all the points analyzed above, we ended the second quarter of the year with a net loss close to 400,000, corresponding to an EPS of minus $0.01. However, excluding noncash items, we generated an adjusted net income of 3.5 million and an adjusted EPS of $0.09. Slide 8 demonstrates our performance indicators for the period examined. As mentioned earlier on, our operational utilization of Q2 ‘18 was in the order of 97.8%. Our best performance is the first quarter of 2014. Our adjusted time charter equivalent marked a noticeable rise of almost $1000 per day, denoting improved market conditions. In terms of operating costs, we reduced our daily OpEx, assuming no bareboat charters by almost $400 compared to Q1 ’18, that's coming closer to our Q2 ‘17 performance. Looking at our balance sheet in slide 9, we managed to preserve very good liquidity of almost 56 million in free cash, bound to increase with the net proceeds from vessels sold. Our gearing remains at low levels in the order of 44%. In terms of net debt ratio, we stand at about 39%. Compared to our balance sheet as at the end of 2017, we increased leverage by 88 million, as we assumed debt in order to finance the delivery of our three new semi-ref LPGs. Our current debt is close to 473 million and we will follow a tight principal repayment schedule for the next couple of years, which is actually posted, given that we have entered an increasing LIBOR environment. Slide 10 presents on a daily basis the evolution of our breakeven against our average time charter equivalent. What we notice is that our daily average time charter equivalent has increased quite substantially, while the slight reduction to our breakeven is an outcome of our daily OpEx reduction. I would now hand you over to our CEO, Mr. Harry Vafias, who will discuss market and company outlook.

Let's now proceed with slide 11. As explained in the past, revenues for small LPGs stem almost exclusively from intra-regional trade. That follows a growing trend, both in the regions of Europe and the Asia Pacific. A key focus country for small LPGs is China, particularly for the trade of pet-chems. The reason behind this is that while global trade of pet-chems grew by 2% in ’17, China increased its imports by 14%. In ’17, China imported 91% of its olefin gases from the Asia Pacific region and these short haul voyages were very beneficial for the small LPG ships. With regards to the recent trade war between China and the US, LPG trade is quite flexible, therefore the 25% Chinese import tax on US LPG might not affect prices to a great extent. Based on analyst reports, US volumes will be diverted to either East Asian countries, while Middle East volumes will head to China. Therefore, short haul trade will remain seriously unaffected. Moving to slide 12, we see that during Q2 ’18, rates for small LPGs continued their positive momentum. Compared to a year ago, rates of all segments, excluding rates for the 7,500 cbm, have increased by more than 20%, which is equivalent to about $1500 per day. Due to the weak seasonal element, market rates are expected to remain at second quarter levels in the third quarter of this year as well. However, heading to the winter period, we might see a further strengthening of the market. Looking at our segment’s trade, west of Suez, it became evident through the past quarter that the balance on the 3,500 and 5,000 cubic meter ships have tipped in the owner’s favor and we have seen reasonably healthy spot rates achieved for a substantial time. Several ships have left and are about to leave the region, which has left significantly less spot candidates to choose from for the charters. The spot market in Asia was relatively active throughout the first part of Q2 ’18, but as the summers turnaround, momentum in season for most of the pet-chem plants, the second part of Q2 and the first part of Q3 is a slower period. Despite the slower period, during the summer, we do not foresee -- we do foresee a gradual further tightening of the Asian market as the turnaround maintenance season ends. In addition, we see vessels leaving international trading for domestic markets and with very limited new building deliveries, this means improved bargaining power in the owner's favor. As far as scrapping is concerned, the small LPG segment has substantial old tonnage, which together with new environmental regulations may trigger exactly an even fleet decline. Since the beginning of the year, we have witnessed four pressurized ships being sold for demolition, while in ’17, the total number of vessels scrapped was 5. As per published newbuilding orders, there are 8 vessels that is only 2.4% of the total fleet to be delivered between July ’18 till the end of 2020, the smallest order book of any ship type prevailing in the shipping industry. On slide 13, we discuss our company's outlook, commencing with our share performance for the past eight months. The performance of our stock is presenting along with selected gas carriage peer group and the price of oil. Most energy related stocks have a weaker correlation to oil prices, which follows a positive momentum for the biggest part of the period presented. For the past couple of weeks however, the price of oil follows a declining trend because of significant crude buildup and anticipation of slower oil demand growth. During the past quarter, gas share has faced downward pressure, while we have witnessed low trading volumes. On slide 14, we’re showing different scenarios on the company's performance for the remainder of ’18 and year ’19. The different scenarios were created based on existing fixed charters plus vessels open on the spot market, assuming no new charters upon the expiration of its fixed vessel. Revenues were calculated using an estimated spot rate based on the current market and an individual utilization rate for each of the vessels. Compared to the previous forecast presented, we increase our estimate for operational utilization, increased estimated spot rate, as our market time charters have improved and accounted for the deliveries of all vessels we have agreed to sell at the respective delivery dates. Spot rate fluctuation has less impact on our 2018 figures, which is quite natural as we have two quarters more to go and 74% of our remaining fleet days are secured on period charters. For 2019, however, spot rates increase has a far greater impact on our figures. As presented, a $1000 increase in daily rates will boost our annual EBITDA by about 10 million, while a $2000 hike in rates will increase our annual EBITDA by as much as 20 million. Should rates continue to rise in year 2019, it will be an exciting and profitable period for our segment. On slide 15, we can see some valuation multiples of StealthGas against comparable companies. As evident, our company trades at a greater discount than its peers in terms of net asset value. Our market cap is currently close to 160 million and based on this, we have quite a low enterprise value, close to 600 million. We are indeed undervalued since the market value of our small LPG fleet alone is around 650 million. Based on our current market cap, it's as if our semi-ref vessels and tankers have zero value, however, these vessels generate about 25% of our EBITDA. Concluding our presentation with 16, we summarize all the reasons why we feel StealthGas is a good investment, as the market leading company in a niche market with promising fundamentals. Now that our market is stronger, we feel even more optimistic for the quarters to come. Mr. Michael Jolliffe will summarize our concluding remarks for the period examined.

Thank you, Harry. In spite of the seasonally weak period for our markets, the second quarter of 2018 was a very solid quarter, as we managed to achieve an operational utilization of 97.8%, our best performance since the first quarter of 2014. The combined effect of the improving market and the company's sound management positivity impacted our results. Market rates for the small LPG carrier segment continued to rise, resulting in an increase in both our time charter and spot revenues. We believe that market fundamentals in terms of demand for LPG and the limited order book will improve the day rates even further. Our company is well positioned to take advantage of these opportunities. We are focused on following a chartering policy, in line with what the market indicates and at the same time seeking to contain costs. We have been very active lately in terms of our sale and purchase activity. And since the beginning of the year, having agreed to sell seven small LPG vessels, mostly older ones, that would enhance our cash position by approximately $30 million. Surprisingly, our market cap is about 150 million when our fleet is valued in excess of 1 billion. With strong balance sheet in terms of liquidity and low leverage, a top quality fleet and promising market fundamentals, we are optimistic about the future of StealthGas. We have now reached the end of our presentation and we would like to open the floor for your questions. So operator, please open the floor. Thank you.

[Operator Instructions] And we will take our first question from Randy Giveans with Jefferies.

Question about utilization. So if we can look at, I guess, slide 14 on your presentation. So you mentioned utilization was 97.8. But on this chart, it’s showing operational utilization of 94.2 in 2Q. But then rising to 96.6 and then 97.1 in 3Q and 4Q. So basically I'm asking is 3Q and 4Q?

Just spelling mistake. Randy, don’t waste your breath. It’s a spelling mistake. The right one is the one we just read about.

All right. So do you expect 3Q and 4Q to be higher than 97.8% or at least in line with it?

No. I don't expect Q3 to be higher. Maybe Q4 might be higher. Q3, no, I don't expect it to be higher.

Okay. But in the 95, 96, 97 range?

Yes.

Okay. Secondly, you’ve announced the sale of obviously the seven older LPG vessels, you still have a handful of vessels over 15 years of age or so. So all [indiscernible] proceeds, any interest in buying second hand vessels from your peers or just de-levering the balance sheet or share repurchases, can you give a priority ranking for uses of cash?

Yes. As we've discussed that before, we won’t do anything until we see Q4 results. When I say anything, I don't mean that we will lock the money up. Of course, it will be used to pay down debt, of course, we might find an amazing opportunity to buy something, but I doubt it. But generally speaking, on the dividend or share buyback, as we have discussed in the previous call, the board wants to see the Q4 results first and then if this market improvement is indeed solid and we generate even more cash, then obviously we'll have to discuss reinstating a dividend or if the stock is still trading at such a big discount, buying back more stock.

Two more questions. The order book, as you say, it only has about 8 vessels still to be delivered. Do you have a kind of timeframe for, if an order was placed today and [indiscernible] wanting to maybe build or able to build these small vessels, but that said, if an order was placed today, is it a 12-month, 18-month, 24-month lag until delivery?

I remind you Randy that the major yards in China and Korea don't build these vessels. So this is a huge bone for our segment. But if you found a small Japanese yard to build a ship today, you would need 24 months wait.

Okay. And then just to clarify, you said the 25% EBITDA contribution that is on the Handysize LPG vessels and the crude tankers, correct?

This is the four semi-ref new builds plus three product tankers plus one crude tanker. So, a total of 8 ships contribute about 25% of the EBITDA.

Correct. So the non-small –

And their valuation by the market is zero.

Zero. Right. Definitely a disconnect there.

[Operator Instructions] And we'll move next to [indiscernible]. Caller, please check your mute function.

Yeah. I apologize. I had a couple of questions. One is on the revenue backlog of 170 million. Can you give us a breakout by year on that backlog?

There is a smaller breakdown in the page in slide 5. You see most of the charters are indeed within ‘18 and ’19. Then, there are few vessels that are going until ’20 and ’21 and only a couple until 2022. But I don't have the complete breakdown with me.

Yeah. I was sort of asking that 74% that's already booked for the remaining days? What the revenue associated with that time would have been or would be?

We can come back with that, if you want to send an email, we can come back with that. I'm sure I don't have it in front of me.

Okay. And I want to say, I'm not sure I've seen that chart that you did on asset sales on page 3, but that's really helpful. On the three new time charters that you highlighted in the press release, can you give us a flavor for where -- what the rates are, the specific rates on those, so it's Lucidity, Pasha and the Cerberus?

Unfortunately, Paul, we don't give this kind of information. It's a very small market with a very tight competition. So if we talk about specific ships and specific numbers, then we will lose an advantage. The point is that any ship, which is 3,500 or 5,000 cubic meter has seen a significant increase from last year and we hope now that hopefully we're going to have a quite a strong winter, we are going to see a further strengthening in all sub segments of the pressurized market.

[Operator Instructions] And we will take our next question from [indiscernible].

Harry, you had entered into some short term one-year charters for the four SRs when they hit the water. Can you elaborate or share in terms of your thesis as to why you did the one-year charter at that point? What's going on in the market now for rates? Have you seen stabilization? Have you seen an improvement for those, that 22,000 cbm category? That’s question one.

Yes. David, can you speak a bit louder because we barely can hear you?

Okay. I'll start again. So you had entered into one-year time charters through the four SRs when you took delivery of them, staggered over the last couple of quarters. Can you elaborate or discuss your thinking at that point and why the one-year charters, what was happening in the market at that point? And are you seeing stabilization, firmness or improvement in the rates in those categories?

Yes. Very good question. As you know well, David, in any shipping segment, when you are at the bottom of the market, you try not to fix long in order not to lock yourself in at loss making rates. So very simply that was our thinking. We didn't want to lock the ships longer despite the fact we had the opportunity to do so, because these are brand new ships with fantastic technology on board, the current sub-segment is at a down cycle and therefore, we didn't want to lock them up and then regret the decision if the market picked up. The market is fairly the same, hasn't changed a lot. Some people are bullish from the New Year onwards. We have to wait and see. The order book is thin. We haven't seen any scrapping, that fleet is quite modern. As I said again, we have to wait and see. By fixing for one year, you lock yourself up at the small loss to your all inclusive breakeven, but then you have the opportunity to get a higher rate if the market improves on those ships as it did improve on the pressurized ships.

So if you're incurring a modest loss to the all-in breakeven, these ships are still slightly positive to EBITDA, so in that 25% of your EBITDA coming from the tankers and SRs, how would that breakdown between the two buckets with the SRs?

I don't have that information, David. You can send us an e-mail. We can revert on that, because not all the semi-refs are fixed at the same rate and not all tankers are fixed at the same rate obviously. So if you want to divide the semi-refs and the tankers, please send us an e-mail and we'll check with our lawyers if we can divulge that information.

Okay. And could you just share your thoughts in terms of where we are in the product market at this juncture? Do you see that market fundamentally improving? Do you expect more turbulence there?

The product tankers you mean?

Yes.

Again, we are at the bottom of the market for that market too. Again, we are fixing relatively short term three or six or three months or six months or one year for the same reasons as explained before. People are bullish because of the new regulations for fuel with the distillates and so on that that will push the product tanker market up. It's a bit soon because we are in Q3 ‘18 and that is Q1 2020. But, I don't see a very -- I don't expect a very big increase in the product tanker rates within the next six to nine months.

Okay. And last question, so we delivered approximately USD20 million EBITDA in the second quarter. If I were to mark the book to market, looking at all your current charters, with the -- can you give us some order of magnitude of what the market run rate of EBITDA would be for your portfolio?

I don't have that information, David. I don't have that information because you have, because on the one hand, you have what you said, which is completely right, but on the other hand, you have a big number of ships leaving the company as we just discussed and that will have an effect on the EBITDA. So I wouldn’t like to throw numbers without having done the calculations.

Okay. Maybe you can add that as a slide for the next quarter in terms of where the run rate of the businesses at current market rates if we have every charter re-indexed to market.

Yeah. But most of -- we have a lot of ships that are not coming open, let's say, within the next quarter. That's why we have the slide with the EBITDA calculator, for that specific reason. You take the ships with the existing charters plus sorry.

Okay. No. I understand what your slide shows. I'm just trying to get a sense of, if I were to mark the whole book to current market rate, what my theoretical cash flow would look like at that moment?

Yes. I understand what you're just saying. Yes. It's not a difficult calculation to do. I mean, you can do it on your own as well if you have the EBITDA calculator, but anyway, I get your comment, it's a fair comment.

All right. Well, congratulations on an outstanding quarter.

Thank you. We hope we continue like that for the remaining of the year.

And there are no further telephone questions at this time. [Operator Instructions] And there are no telephone questions at this time.

We would like to thank everybody for joining us at our conference call today and for your interest and trust in our company and we look forward to having you with us again at our next conference call for our Q3 2018 results in November. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.